OECD DEVELOPMENT CENTRE

Working Paper No. 29 (Formerly Technical Paper No. 29)

THE STATUS AND AN EVALUATION OF THE ELECTRONICS INDUSTRY IN TAIWAN

by

Gee San

Research programme on: Technological Change and the Electronics Sector - Perspectives and Policy Options for Newly Industrialising Economies

October 1990 TABLE OF CONTENTS

SUMMARY ...... 9

PREFACE ...... 11

I. INTRODUCTION ...... 3 1

II. THE CURRENT STATUS OF TAIWAN’S INFORMATION INDUSTRY ...... 5 1

III. EVALUATION OF TAIWAN’S ELECTRONICS INDUSTRY ...... 0 2

1. Electronic Parts and Components ...... 0 2 2. Semi-conductors ...... 1 2 3. Microcomputers and Peripheral Devices ...... 2 2 4. Consumer Electronic Products ...... 3 2 5. Telecommunications Equipment ...... 3 2 6. Summary on Taiwan’s Electronics Industry ...... 4 2

IV. TAIWAN’S STRATEGIES IN PROMOTING THE ELECTRONICS INDUSTRY ...... 6 2

1. Manpower ...... 6 2 2. Environment ...... 8 2 3. Government Sponsored Institutions ...... 0 3 4. Evaluation of the Government Strategies ...... 2 3

V. CONCLUSION ...... 4 3

NOTES AND REFERENCES ...... 6 3

BIBLIOGRAPHY ...... 8 3

APPENDIX: Survey on FDI (1987) ...... 7 5

7 RÉSUMÉ

Le secteur des techniques de l’information a connu à Taïwan une croissance exceptionnelle au cours de la dernière décennie, au point qu’on le considère aujourd’hui comme l’un des premiers du monde. Massivement orienté vers l’exportation, il repose sur deux produits principaux - les micro-ordinateurs et les moniteurs d’ordinateurs -, au premier rang en termes de croissance et de parts de production. Eléments et composants électroniques font également l’objet d’une importante production. Ce type d’exportations taïwanaises reste caractérisé par sa faible valeur unitaire moyenne, sauf en ce qui concerne les moniteurs, qui ont rapidement atteint la moyenne mondiale.

La part des exportations des vingt sociétés dominantes a fortement diminué pendant la dernière décennie, témoignant du dynamisme du secteur des petites et moyennes entreprises. De même, la chute, dans ces exportations, de la part des sociétés à capitaux étrangers constitue un bon indicateur de la puissance relative des firmes nationales. Les échanges internationaux ne se concentrent plus uniquement sur le marché des Etats-Unis, grâce à une diversification réussie, notamment en direction de l’Europe.

L’étude de 318 entreprises de l’industrie électronique à Taïwan met en évidence nombre de différences significatives entre sociétés à capitaux nationaux et sociétés à capitaux étrangers. Ces dernières emploient une plus forte proportion de techniciens par rapport à leur main-d’oeuvre totale. Elles investissent davantage dans la formation des dirigeants et des ingénieurs. Elles consacrent aussi plus de moyens à la recherche-développement (R&D) et se tiennent plus volontiers à la pointe technologique de leurs secteurs respectifs que leurs concurrentes taïwanaises. Tandis que les entreprises à capitaux étrangers considèrent que les capacités limitées de conception de nouveaux produits de Taïwan créent d’importants goulets technologiques d’étranglement, les entreprises nationales se consacrent davantage à l’utilisation pratique des équipements techniques.

Les pouvoirs publics ont joué un rôle de catalyseur dans le développement de l’industrie électronique à Taïwan, à l’aide de prêts à faibles taux d’intérêt aux entreprises, dans le cadre du Programme d’aide aux industries stratégiques (Strategic Industry Assistance Program), grâce à des aides financières au bénéfice d’institutions- clés de R&D et d’assistance technique et enfin grâce à la création du Hinchu Science- based Industrial Park, destinée à inverser le "drainage des cerveaux".

SUMMARY

Taiwan’s information technology industry has experienced phenomenal growth in the last decade, and it is currently ranked among the largest in the world. The growth has been overwhelmingly export-oriented, with microcomputers and computer monitors leading in terms of both growth and production shares. The island also has a very large production of electronic parts and components. Taiwan’s exports of these information technology products still consists of items with low average unit value, though in the case of monitors its exports have rapidly converged to the world

9 average.

The share of exports concentrated in the 20 leading firms has declined steeply over the last decade, reflecting the dynamism of the small- and medium-scale firm sector. Likewise the share of foreign invested firms in exports has fallen significantly, indicating the relative strength of domestic firms. The degree of concentration of information product exports on the US market has also fallen, reflecting successful diversification especially into the European market.

A survey of 318 firms in Taiwan’s electronics industry reveals a number of significant differences between domestic and foreign invested firms. The latter employ a significantly higher proportion of technical personnel in relation to their total workforce. A higher proportion of foreign firms invest in training of managers and engineers. They also spend more per employee on research and development (R&D) and are nearer to the technological frontier in their respective fields than local firms. While foreign invested firms see limited product design capabilities in Taiwan as the major technological bottleneck, domestic firms are more concerned with the effective utilisation of tools and machinery.

The government has played a catalytic role in the development of Taiwan’s electronics industry. It has provided low-interest loans to electronics firms under the "Strategic Industry Assistance Program", sponsored key R&D and technical support institutions, and established the Hinchu Science-based Industrial Park to promote a "reverse brain drain".

10 In this paper, we will examine several key problems that are critical to the future development of Taiwan’s electronics industry. First, what is the status of Taiwan’s information technology industries? Second, what are the roles of FDI firms in Taiwan’s electronics, as well as information technology industry? Third, are FDI firms really more effective as a medium for technology transfer than either OEM or technological cooperation? Fourth, what are the major technological bottlenecks faced by Taiwan’s electronics industry? And last, what roles and policies should the government adopt to overcome the technological barriers?

We hope this paper will shed some light on the future development of Taiwan’s electronics industry and be beneficial to other developing countries as well. There will be five sections in this paper. In Section II, we will discuss the status of Taiwan’s electronics industry. In Section III, we will evaluate Taiwan’s electronics industry in terms of the current technology level, major development bottlenecks, and the role of foreign firms. After understanding the industry status, in Section IV, we will discuss the government’s role and strategy in developing the electronics industry. Finally, in Section V, we will summarize the paper, outlining the future potential of Taiwan’s electronics industry.

14 However, as accumulated technology improved and the monitor market became competitive, these home electrical appliance firms shifted production again. This time, they shifted to the higher value-added products such as microcomputers. Thus, starting in the mid-1980s, Taiwan’s microcomputer production increased rapidly. Its 1986 production value reached $456 million. Although this was still below the monitors’ $501 million, by 1987 this value had jumped to $868 million, exceeding the monitors’ $849 million, thus making it second only to parts and components. Even in terms of annual growth rates, the microcomputer’s 90 per cent was only next to parts’ and components’ 110 per cent. It is foreseeable that parts and components, microcomputers, and monitors will become the top three information technology products in Taiwan.

Table 2-4 shows a comparison between Taiwan’s and the world market’s production volume in terms of quantity and value. Based on this table, the share of Taiwan’s production value in the world increased from 1 per cent in 1985 to 2.4 per cent in 1987. Moreover, it was projected that, by the end of 1988, the ratio would increase to 3.2 per cent and that Taiwan would become the world’s sixth largest information technology product producing country.

Looking at individual products, Table 2-4 shows that, in 1987, Taiwan’s microcomputer production quantities accounted for as much as 11.6 per cent of the world’s total production. However, its export value accounted for only a mere 2.3 per cent. This was due to the low-end microcomputers being exported by Taiwan. Its exports were mostly for home-use microcomputers that require only a single mother board and no hard disk drives. In addition, since most of these exports are for OEM cu2stomers, these exports were the high-volume, low-priced type of products.

With regard to monitors and terminals, although their ratios were very high both in terms of quantity and value, the growth rate of terminals has been decreasing in recent years while monitors are expected to increase as the demand for microcomputers keeps growing. For peripherals, such as hard disk drives, printers and image scanners, Table 2-4 also indicates that Taiwan’s exports of these products will be very limited. They only accounted for less than 2 per cent of the world market. In contrast, scanner exports will be very even in terms of both quantity and value. They presently account for more than 20 per cent of the world market.

With respect to spare parts, aside from the major export item - add-on cards -, Taiwan also exported large quantities of motherboards, graphics cards, memory cards and various controller interface cards. Considering that there is a large after sales market for microcomputers plus the large second generation PC market led by the IBM PS/2, the growth of computer spare parts will be very strong. Likewise, Taiwan has overcome the bottleneck of keyboard production technology. Its production value and quantity have already reached more than 25 and 35 per cent respectively in the world market. It is expected that, with its rapid development, Taiwan will become a major supplier of membrane switching keyboards, graphics cards, facsimile cards and LAN cards in the world market.

16 Among the items exported to Europe, microcomputers had the highest share -- in 1987, 50.14 per cent of the total microcomputer export value. In contrast, exports to the United States consisted only of 35.56 per cent. In addition, exports of hard disk drives, printers, terminals, and monitors to the European market accounted for about 30 per cent of the total for these products.

With regard to imports, Table 2-6 shows the ratio of information technology product imports to total imports of electronics products. From this table, we can see the increase in the information technology product imports from 9.0 per cent in 1983 to 16.3 per cent in 1986, though there was a slight decline in 1987 to 14.7 per cent. Taiwan’s reliance on imported information technology products can be evaluated through the ratio of import value to total domestic demand value. This ratio was about 84 per cent in 1983 and had decreased to 70.2 per cent by 1987. This decline is due to the government’s promotion of local production, as against importation, to develop the local industry.

Table 2-6 also shows that imports of spare parts were not significant from 1982 to 1987. They only accounted for 26 to 30 per cent of the total imports of information technology products. As for computer finished goods, the import ratio has declined rapidly from 46 per cent in 1982 to 17 per cent in 1987. This, again, reflected the development of Taiwan’s information technology industry, where a great portion of the domestic demand for computer finished goods can be met easily by local firms.

Taiwan’s total import value for information technology products has increased from 1982’s $138.3 million to $813.5 million in 1987. Furthermore, its ratio to total world production value has increased from 0.16 per cent in 1982 to 0.58 per cent in 1987. As to import sources, the United States and Japan are the major suppliers. In 1982, imports from the United States accounted for 65 per cent of the total imports. However, this ratio decreased to 32.5 per cent in 1987. In contrast, during the same period, imports from Japan increased from 22 per cent in 1982 to 44 per cent in 1987. Apparently, Japan has taken over the United States as Taiwan’s most important supplier. It is also noticeable that as Taiwan’s reliance on imports of information technology products declines, imports from the United States and Japan have also declined. In 1982, whereas imports from the United States and Japan accounted for 87 per cent of total import value, they had decreased to 76.9 per cent in 1987.

From the above discussion, we can see that foreign and FDI firms have played very important roles in the development of Taiwan’s information technology industry. In fact, based on the number of FDI applications and the amount of actual investment approved by the Ministry of Economic Affairs, we can see the magnitude of foreign capital infusion into Taiwan’s electronics industry. From 1952 to 1985, there were 423 FDI applications that were approved. The total investment involved reached $1.48 billion. Among the approved applications, 140 or 33.09 per cent of the total were from the United States. The total investments of these US-based FDIs amounted to $80.8 million or 54.56 per cent of the total amount of investments approved. The number of approved applications from Japan amounted to 52 per cent or 220 of the total applications. However, in terms of the amount invested, the Japanese have only $33.1 million or 22.3 per cent of the total. Another major investment source was

18 III. EVALUATION OF TAIWAN’S ELECTRONICS INDUSTRY

In Section II, we discussed the status of Taiwan’s information technology industry. In this section, we will discuss the technology level of Taiwan’s electronics industry, its technology bottleneck, and the roles of FDI firms. The source of this discussion is based on a survey of the Taiwan electronics industry in 1987 including 318 samples. Five major product categories were included in the study: electronic parts and components, semi-conductors, computers and peripheral devices, consumer electronic products and telecommunications equipment1. A sample survey questionnaire is shown in the Appendix.

1. Electronic Parts and Components

In the survey, there were 77 firms manufacturing electronic parts as their major products. Among them, 58 were domestic and 19 were FDI. Of the 19 FDI firms, 11 had a foreign capital share greater than 50 per cent (called FG50 firms hereafter), while the remaining 8 had a foreign capital share of less than 50 per cent (called FS50 firms hereafter). Although the average export rate of the 77 firms is 63.5 per cent, FDI firms have a higher percentage.

The major export market is the United States followed by Southeast Asia, Europe, and then Japan. However, it should be noted that the 77 firms have different export markets. From Table 3-1, we can see that the Japanese FDI firms have concentrated more on the Japanese markets, the US FG50 firms on the US and Southeast Asian markets. The only one European FG50 firm in the sample has concentrated on the US market too.

In terms of technological intensity, from Table 3-1 we can see that the US and European FG50 firms have a higher percentage of engineers and technicians employed in their work forces. This thus indicates a superior technological orientation than the rest. Comparatively speaking, the domestic firms also have a better technological advantage than the Japanese FG50 firms and the FS50 firms.

As far as the level of technology transfers is concerned, Table 3-1 shows that of the 58 domestic firms, only 3.45 per cent had technological cooperation with foreign firms. In contrast, FDI firms had lots of technological cooperation with either their parent companies or other foreign companies. The FDI firms, aside from introducing new technologies to Taiwan, also provide in-service training for the work force and R&D for technology promotion. However, it should be emphasized that the European FDI firms have placed a higher emphasis on in-service training than the Japanese and US FDI firms. Akin to the FDI firms, 31 per cent of the domestic firms have also conducted in-service training (as shown in Table 3-1).

20 3. Microcomputer and Peripheral Devices

As discussed in Section II, microcomputer and peripheral devices are the most important products of Taiwan’s information technology industry. In this study, 45 firms are engaged in the microcomputer and peripheral device business: 24 are domestic firms and 21 are FDI firms. Of the 21 FDI firms, 2 FG50 firms came from Japan, 7 from the United States and 2 from Europe. The survey results are summarized in Table 3-3.

The export rates of microcomputer and peripheral devices are very high, about 76.40 per cent; but domestic firms have even a higher rate of 83.33 per cent. The United States is the major export market, with a 53.3 per cent share of the total export value. The European market is ranked second with a share of 24.4 per cent. It is noticeable that the above export shares are very close to the total export rate mentioned in section II. Therefore, we can conclude that our survey results are in accordance with the survey populations. Observing domestic and FDI firms, our samples show that the major export markets of domestic and FS50 firms are the United States and Europe; for FG50 FDI firms, the major export market is concentrated in the United States; and for Japanese FG50 firms, the major export market is Southeast Asia.

With regard to technical employees hired, Table 3-3 shows that about 18.44 per cent of domestic firms’ employees are engineers and technicians. In contrast, FDI firms, except for US FG50 firms, have even higher percentages. Similarly, FDI firms have also devoted more effort to introducing new technologies through technological cooperation. Even in terms of in-service training, FDI firms’ investments are higher than those of domestic firms; Japanese FG50 firms’ investment in in-service training is much higher than any other firms, while European FG50 firms’ investment is ranked second.

Moreover, FDI firms have also invested more in R&D than domestic firms. Table 3-3 shows that in 1986, the average total R&D expenditure of the 24 domestic firms was only NT$2.203 million while the 21 FDI firms had NT$25.004 million or about 12 times that of the domestic firms. However, considering that the scale of domestic firms is usually smaller than that of FDI firms, a comparison based on average R&D investment per employee would be more appropriate. Using this basis, although the result is similar, the gap is smaller. Overall, it can be said that FDI firms are technologically more aggressive than domestic firms.

However, regardless of the FDI firms’ aggressiveness, Taiwan’s technology is still lagging behind the world’s: domestic firms lag by 2 years while FDI firms lag by only 0.05 year. Basically, almost all of the firms agree that insufficient technology for new product development is the main culprit. In addition, Japanese FDI firms also regard the lack of quality inspection and control technologies as major bottlenecks.

22 this industry, no firm in the survey had ever conducted technological cooperation with foreign or mother companies.

In terms of R&D investments, Table 3-5 shows that, in 1986, the total R&D expenditure of the 5 FDI firms was about 20 times that of the 20 domestic firms. Even when using the average expenditure per employee, the gap was still a large one at four times. Considering this, it can be concluded that Taiwan’s telecommunications industry is still very underdeveloped.

Supporting the above conclusion, Taiwan’s telecommunications technology lags behind the world’s level by at least about 1.2 years. In fact, even when comparing the domestic firms’ technology level with that of the FDI firms, the gap is also about 1.2 years (1.38-0.2). This gap is the largest among the five electronics industries discussed in this study. The causes of this industry’s lacklustre performance include most of the factors mentioned in the other industries. However, in addition to those mentioned earlier, the telecommunications industry has an additional factor to consider. This factor is the government’s tight control over the industry due to national security considerations. The iron-handed regulations with regard to the manufacturing and selling of telecommunications equipment have certainly affected the development of the telecommunications industry. It is not surprising at all to find this industry to be Taiwan’s weakest.

6. Summary on Taiwan’s Electronics Industry

For the above five industries, a total of 318 samples were gathered. Of this number, 246 are domestic firms and 72 are FDI firms. As for FG50 firms, 16 are from Japan, 15 from the United States and 3 from Europe. Table 3-6 shows the overall statistical results of the survey.

It shows that the average export rate for the five electronics industries is 63.66 per cent; with both domestic and FDI firms’ export rates above 60 per cent. As to export areas, the United States, Europe and Southeast Asia are the three major markets; only the Japanese FDI firms are able to penetrate the Japanese market. With regard to technological intensity, it was found that domestic firms have a lower ratio of technical employees than FDI firms. Additionally, they also have less technological co-operation with foreign firms.

In terms of technological promotions, the domestic firms are also much more inferior. They did not place as much emphasis as the FDI firms on in-service training and R&D (Table 3-6). Among the FDI firms, the European and US FG50 firms have the highest rate of labor in-service training. Then concerning R&D expenditure, the European firms have the highest, while the Japanese have the lowest investments. In fact, as shown in Table 3-6, the Japanese FDI firms’ investment in R&D expenditure per employee is even worse than that of the domestic firms. Their investment per employee comprise only as much as one-fourth of that of domestic firms.

Comparing Taiwan’s electronic products with the best available similar product elsewhere, the result shows that Taiwan trailed the world’s level by about 0.88 year, of which, domestic firms lagged by 1.03 year, and FDI firms by 0.34 year. On the

24 IV. TAIWAN’S STRATEGIES IN PROMOTING THE ELECTRONICS INDUSTRY

In the early developmental stage of Taiwan’s electronics industry, the Taiwan government did not provide many special privileges. The main support given was only the setting up of the export processing zones to encourage investments from foreign electronics firms. Through this, nonetheless, Taiwan’s electronics industry still progressed. In the 1950s and 1960s, various foreign electronics-assembly firms were attracted to Taiwan’s cheap but quality labor. Consequently, due to the many foreign investments that came into Taiwan at that time, Taiwan’s electronics industry has built up a solid foundation for its future development.

By the end of the 1960s, Taiwan’s labor market had reached the level of virtual full employment with an unemployment rate of 2.67 per cent. As a result, labor costs shot up rapidly. In fact, between 1973 to 1983, unit labor costs in the electronics industry increased from NT$2 380 to NT$11 548 per year -- a rate of about 4.85 times.

This provoked a process of transition from traditional electronics-assembly to high-tech value-added electronics production whose success depends on the following factors: manpower, environment, and government-sponsored institutions.

1. Manpower

In the early years, with its fast growth, the electronics industry has not only created job opportunities but also offered handsome wages. In addition, it is common for electronics firms to have a modern, clean and comfortable working environment. These factors have certainly attracted many workers to join the industry. For graduating students, the electronics industry is naturally their first choice for a job. Likewise, for students entering college, an electronics engineering course is their number one priority. Under these kinds of preferences, the electronics industry has no doubt attracted the best brains in the country, thus providing the essentials for establishing a rigid foundation for its development.

In addition, the government’s educational strategy has also been stressing the engineering and, especially, the electronics fields. Under the government’s limited budget for education at a given time, electronics engineering usually gets a better share. Based on Institute for Information Industry (III) statistics, by July 1987, graduates from electronics and information technology science fields had already totalled 114 628 of which 114 had doctoral degrees, 5 004 had master’s degrees, 44 765 had bachelor’s degrees, and 64 675 had college diplomas. On the other hand, undergraduates who are taking up electronics and information technology sciences as their majors totalled another 57 942 students; 2 383 in graduate schools, 19 655 in universities, and 35 904 in colleges. As can be seen from the number of undergraduates, for every graduate school student there are 8.25 university students and 15.06 college students.

Although formal schooling is just the beginning of a learning process, after schooling a student’s further capability development would depend on how actively and aggressively his/her company trains him/her. In connection with this training, the

26 2. Environment

As discussed in the previous section, today the major feature of Taiwan’s electronics industry is its transformation from a pure electronics-assembly industry to an OEM-producing electronics industry and, finally, to a high-tech producing electronics industry. It has metamorphosed itself from a fragile industrial structure into a well-structured and integrated industry.

The gradual development process mentioned above has certainly benefited the development of the electronics industry. According to the 43 OEM electronics businesses surveyed in this study, 70 per cent of the firms believe that production technology can be effectively acquired, 62 per cent believe that management techniques can be adopted, and 69.95 per cent believe that product design and development technology can be introduced. Apparently, most of the OEM firms are very optimistic regarding the effectiveness of technology transfers through OEM production. Moreover, it is noticeable that the 27 domestic firms are more positive to OEM’s effect on technological transfers than the 16 FDI firms. Obviously, to the domestic firms, OEM production is one of the major channels for acquiring new technologies from abroad. For detailed statistics, see Table 4-1.

Considering that the effectiveness of new technological transfers is dependent upon the technical capabilities of the host firm, Taiwan’s highly-educated and well- trained engineers and technicians will definitely be able to adopt these new technologies. Aside from OEM production, another important factor affecting the effectiveness of technological upgrading is labor mobility. According to the statistics of the Executive Yuan’s Directorate-General for Budget Accounting and Statistics (DGBAS), the average separation rate of the electronics industry from 1981 to 1987 was 5.84 per cent while the average accession rate was 5.97 per cent. Taking these two figures into consideration, the average labor turnover rate in the electronics industry would be greater than 11 per cent. Thus, under such a high labor turnover rate, the technological know-how of the workers can be effectively diffused. This diffusion can be even more effective when high ranking managers or engineers change their jobs.

In our research, we also found that 104 out of the 318 electronics firms have high-level managers and engineers who have work experience in foreign electronics firms. Of this number, only 42.61 per cent feel that working experience with foreign firms is helpful to their management skills, 31.48 per cent feel that it is helpful to product design and development, and 29.52 per cent feel that it is helpful to their acquisition of market information. The detailed statistical results are shown in Table 4-2.

It is also interesting to note that among the 104 firms, 71 of them are domestic firms and 33 of them are FDI firms. These two figures are 28.86 and 45.80 per cent of the total domestic and FDI firms in the sample. It is clear that when high-level managers and engineers from foreign firms transfer jobs, most of them will more likely work for another foreign firm than for a domestic firm. Considering such a possibility, domestic and FDI firms’ opinions on the effect of technology diffusion through labor

28 1989)", it was stressed that one of their most important strategies is to push for the computerization of the various government offices, as well as private enterprises. It actively spreads out the utilization of computers through various computer training courses. Through this computerization drive, the government expects to create additional domestic market demand. Moreover, to support the domestic electronics industry, the government also encourages the various government and private organizations to buy domestically produced information technology products.

As a result, during the past ten years, Taiwan has enjoyed a rapid growth in the installation of computer systems. During 1971, there were only 34 computer systems installed throughout the whole island, these systems belonging mainly to large government organizations, public enterprises, and educational research institutes. In contrast, by 1987, the total number of computer systems installed had increased to 4 544 units, of which private enterprises accounted for 2 377. From Table 4-4, we can see that among the 4 544 units installed, 8 are super-large computer systems, 33 are large computer systems, 705 are medium computer systems, and the remaining 3 798 are mini computer systems4. The users of super large and large-scale systems are concentrated in the various government departments and public enterprises while the users of medium computer systems are mostly in the private sector. From Table 4-5, it can be seen that electrical and electronics industries, finance and insurance businesses, administrative organizations, and educational research institutes are the major users of medium-sized computers while commercial and service businesses, manufacturing businesses, and administrative organizations are the major users of mini-computers.

3. Government Sponsored Institutions

In 1980, to encourage the development of high-tech industry in the country, the Taiwan Government established the Hsinchu Science-based Industrial Park. To encourage potential investors to move into the Park, the government has built up the necessary infrastructure and buildings, and a good living environment; bi-lingual schools, tax waivers, cheap rent, and low-interest loans are also offered to attract long-term investors.

Aside from attracting investments to the country, another objective in establishing the Hsinchu Science-based Industrial Park is to halt the brain-drain from the country. A large number of undergraduate and graduate students never come home after they have finished their schooling abroad. Just as importantly, it hopes to attract experienced and well-established Chinese engineers and technicians back to work for the country.

Taiwan’s electronics firms, due to their medium- to small-scale operations and limited capital, do not have the capital resources for essential long-term research. To help solve this problem the government established two institutions to support the electronics industry. The first is the Institute for the Information Industry (III), a non- profit organization established in 1979 at the direction of the Executive Yuan. Its mission includes: introducing and developing software technology, assisting government agencies and public enterprises in their computerization projects, training and educating information professionals, and supplying market and technology news

30 enterprises. Thus, IC design fits the Taiwan industrial environment excellently. In recent years, the growth of the number of IC design firms in Taiwan has been rapid. Prior to April 1986, there were only 4 professional IC design firms but by June 1987, the number exceeded 40. It is foreseeable that the future development of ICs in Taiwan will be accomplished through cooperation between the private enterprises’ IC design capability and ITRI/TSMC’s ASIC production technology.

4. Evaluation of The Government Strategies

Table 4-6 summarizes the survey results regarding the various firms’ opinions on how to promote Taiwan’s electronics industry’s technology level. From this table, we can see that due to the different product characteristics, the firms have different opinions on what government strategy should be adopted to upgrade Taiwan’s electronic industry’s technology level. As to the electronics parts and components industry, they think that the government should assist the firms in acquiring foreign technology. As for the semi-conductors industry, since the industry is characterized by large capital investments and high risk, they consider that the government should: 1) provide more technology transfers through government-sponsored research institutes, 2) coordinate joint research programs among firms, and 3) educate more R&D people. As for the microcomputer and peripheral devices industry, they consider that the government should educate more R&D people, as well as transfer technology. As to the consumer electronic products industry, they suggest that the government should educate more R&D people and coordinate joint research. Lastly, as for the telecommunications equipment industry, they consider that the government should offer joint research and technological transfers through government-sponsored research institutes.

Taking into account the above opinions, the Taiwan government’s most important missions are: 1) to educate more R&D people, 2) to provide technological transfers through government-sponsored research institutes, 3) to coordinate joint research among the various firms, and 4) to introduce new technologies. On the other hand, low-interest loans and tax exemptions on R&D expenditures are only secondary factors as most firms do not consider them to be the government’s major tasks.

In relation to the methods on how to introduce new technologies, the following discussion details the various firms’ opinions. Both the electronic parts and components and semi-conductors industries consider that self-conducted research and development is the most effective method, followed by direct technology purchases. With regard to technological cooperation, these two industries consider that cooperation with European firms would be better than with those from other areas. The microcomputer and peripheral devices industry, in addition to self-conducted research and development, also think that European firms’ investment and technological cooperation are very effective. The consumer electronic products industry, besides self-conducted research and development, consider that technological cooperation with Japanese firms would be more effective than cooperating with European and US firms. The telecommunications equipment industry consider that self-conducted research and development, European firms’ investment, and OEM production are the more effective methods.

32 V. CONCLUSION

The electronics industry is the largest and most important export industry in Taiwan. It has been developed for more than three decades and has established a solid foundation for its further development. As regards its future, we are quite optimistic about the prospects. In this study, we have identified four factors that favorably affect the development of the electronics industry in Taiwan.

First, there is the industry’s adaptability, flexibility, and determination to achieve greater heights. From the industry’s evolution, we can see that it had gone through different production stages: B/W TV’s in the early 1950s and 1960s, color TV’s in the 1970s, then monitors, and microcomputers in the 1980s. Through this, the industry has registered an impressive growth record over the past decades. In fact, it is expected that, by 1990, its annual production value will exceed Italy’s, and even that of France. It will become one of the world’s top five or six information technology products producing countries.

Second, there are Taiwan’s ample manpower resources. These resources refer not only to non-skilled laborers but also include well-trained, high-quality technicians and engineers. In addition, and more importantly, these skilled technicians’ and engineers’ labor costs are lower than those of the European countries, the United States, and Japan. As such, it provides a clear competitive edge in the international electronics arena. In fact, in the past two years, more than 30 semi-conductor designing companies have established operations in Taiwan, thus clearly indicating Taiwan’s competitive edge.

Third, there is Taiwan’s technological capability. From this study, it was found that the technological gap between Taiwan and the world was not very significant. Actually, domestic firms even performed better than FDI firms in some products. Hence, this indicated a significant improvement in domestic firms’ technological capability.

And, fourth, we have the self-motivated emphasis on R&D. The survey done in this study indicates that most of the firms consider R&D to be the basis to upgrade the firm’s technological level. They do not consider the government’s preferential treatment as necessary to promote R&D effectively.

On the other hand, with regard to problems, this study has also identified three potential problems that may affect the industry’s growth.

First, there is the inability to conduct product design and development. This problem is shared by most of the firms regardless of whether they are in parts and components, semi-conductors, or in any other information technology-related businesses. The survey done in this study reflects the insufficiency of senior and well- experienced R&D manpower. In consideration of this problem, the government may have to take the lead in providing higher-level R&D education.

Second, there is an over-dependence on government-sponsored technology transfers. It was found in this study that many firms want the government-sponsored

34 NOTES AND REFERENCES

1. The parts and components industry includes industries with 4638, 4656, 4657 according to Taiwan’s Custom Commodity Classification Coding System (CCC code systems); the computer and peripherals industry includes industries with 46511, 46514, 46519 according to CCC; the semi-conductor industry includes industries with 4654 according to CCC; the consumer electronics product industry includes industries with 4631 to 4634, 4652, 46515, 4655, and 4658 according to CCC; the telecommunications equipment industry includes industries with 4637 according to CCC.

2. The government did not implement any dramatic policies toward private firms’ training activities except in 1972. In February 1972, the government promulgated the "Vocational Training Fund Statute" which was passed by the Legislative Yuan. According to the Statute, employers in the assigned industries are subject to make contributions to a Vocational Training Fund which are no less than 1.5 per cent of the total payroll of all workers. But the Statute was suspended indefinitely only 18 months after its implementation. For details on the implementation of the "Vocational Training Fund" System, please refer to San, G., and Chen, C.N., In-Service Training in Taiwan R.O.C., CIER Monograph Series no. 20, Chung-Hua Institution for Economic Research, CIER, Taipei, 1988.

3. There are 91 major electronics products which are listed as being part of strategic industries in Taiwan. For instance, personal computers, word processors, translators, graphic terminals, work stations, ferrite heads, thin-film heads, disks, carriage actuators, optical readers, plotters, VCRs, digital audio and video players, semi-conductors, modems, CNC controllers, application software packages, systems software, and database management systems are all on the list.

4. According to the Computer Industry Report 1987 published by the International Data Company, computer systems have been divided into 5 categories in terms of their capacities and costs: 1) super computers, including CYBER 205, IBM 3090 or other type of computers with a similar capacity; 2) large-size computers, including computers which are able to support 128 users and have average prices of over 1 million US dollars, i.e., IBM 3080; 3) mid-size computers, including computers capable of supporting 17 to 128 users, and costing between 100 thousand to 1 million US dollars, i.e., IBM 9370, 4300, or VAX 8500; 4) minicomputers, including computers capable of supporting 2 to 16 users and costing between 10 thousand and 100 thousand US dollars, i.e., the IBM 5550. The Institute for Information Industry (III) in Taipei has adopted the above definitions for their statistics and these appear in Table 4-4 and Table 4-5 of this study.

36 BIBLIOGRAPHY

Annual Report on the Information Industries in the R.O.C., Bank of Communications, April 1988, (in Chinese).

Annual Report on the Household Appliances Industry in the R.O.C., Hua-Nan Commercial Bank, April 1988, (in Chinese).

CHEN, C.N., "The Entry, Exit and Growth of Electronics Firms in the Taiwan Area," Academia Economic Papers, The Institute of Economics, Academia Sinica, March 1985, (in Chinese).

HSUEH, K.T., and C.C., YU, "Science and Technology Policies in the Republic of China", Proceedings of the 1984 Joint Conference on the Industrial Policies of the Republic of China and the Republic of Korea, CIER, Taipei, December 1984.

LIU, R.T., "Methods to Develop the High-tech Industry (in Taiwan)", Industrial Economics, Cooperative Bank, June 1988, (in Chinese).

Report on Information in Taiwan, Cooperative Bank, April 1988, (in Chinese).

SAN, G. "Direct Foreign Investment and Technology Transfer in the R.O.C.," Proceedings of the 1987 Joint Conference on the Industrial Policies of the Republic of Korea and the Republic of China, KDI, Seoul, February 1988.

SAN, G., and C.N. CHEN, In-Service Training in Taiwan R.O.C., CIER Monograph Series No. 20, CIER, Taipei, 1988

SAN, G., K.T. HSUEH, W.J. KUO, L.H. LIN, and C.C. YU, Research Report on the Use of FDI to Upgrade Taiwan’s Industrial Technology, CIER, 1988, (in Chinese).

SCHIVE, C., and K.T. HSUEH, "The Experience and Prospects of High-Tech Industrial Development in Taiwan, R.O.C. "The Case of the Information Industry", Proceedings of the 1987 Joint Conference on the Industrial Policies of the Republic of China and the Republic of Korea, CIER, Taipei, February 1987.

SIMON, D.F., and C. SCHIVE, "Taiwan’s Information Industry: The Role of the State in the Development of the High-Tech Industry", Economic Essays, National Taiwan University, 13 June 1985.

1987 Yearbook on the Information Industry in the R.O.C., by the Institute for Information Industry (III), Taipei, December 1987, (in Chinese).

1986 Yearbook on the Information Industry in the R.O.C., by the Institute for Information Industry (III), Taipei, December 1986, (in Chinese).

38 APPENDIX: SURVEY ON FDI (1987)

Questionnaire concerning the performance and impacts of Direct Foreign Investment Firms in the R.O.C.

Conducted by Chung-Hua Institution for Economic Research (CIER)

Date: February, 1987

58 II. PRODUCTION TECHNOLOGY

1. What is your major product:

As for the above product its

Export Ratio is:

Major exporting country is:

Total sales are (NT$):

Unit price is (NT$):

2. How do you evaluate your company’s product, in terms of its technological level,

functions, and quality, as compared with another similar product which is ranked

number one in the world?

a) Better. If it can be measured in terms of a time span, then by

approximately how many years does it lead by? years.

b) About the same.

c) Worse. If it can be measured in terms of a time span, then by

approximately how years does it lag by? years.

3. As for the type of industry your company belongs to, how do you evaluate such

an industry’s technological level in Taiwan as compared with that for a

comparable industry in the developed countries such as the United States,

Japan, and European countries?

a) Better. If it can be measured in terms of a time span, then by

approximately how many years does it lead by? years.

b) About the same.

c) Worse. If it can be measured in terms of a time span, then by

approximately how years does it lag by? years.

4. 1) Is your company currently engaging in any technological cooperation with

60 d) Quality control.

e) Others.

6. Is your company’s main product contracted by original equipment manufacturing

(OEM)

a) No.

b) Yes. By which country is it contracted?

7. What is your opinion regarding OEM?

12 3 4 5 very effective acceptable not useless effective effective

1) In terms of introducing Production technologies: 2) In terms of promoting Managerial technologies: 3) In terms of promoting product Design technologies: 8. Has any one of your company’s senior managers or engineers ever worked for foreign firms before? Here, the foreign firms are defined as those companies which are specifically utilizing their parent company name such as SONY, RCA, & PHILIPS in the R.O.C.. a) No. b) Yes. Companies mainly belonging to which country? Does their work experience in those foreign companies have any value at all? very some useless helpful help 1) In terms of managerial technology improvement 2) New product design 3) Acquisition of marketing information 9. What the most effective method, in your opinion, which can be used to promote

62 Engineers & Technicians for per cent Operators accounted for per cent 2) How many people were sent abroad for training? For how many weeks on average? 3. Topgrade the level of technology, in your opinion, what should we do to improve the quality of in-service training? a) Commission more training to public training centers. b) Commission more training to private training centers. c) Cooperate with vocational high schools. d) Conduct one’s own training. e) Hire other workers with experience. f) Others.

64